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CFTC Adopts Anti-Manipulation, Swaps Trader Reporting Rules

The Commodity Futures Trading Commission (CFTC) Thursday voted out final rules that broaden the agency's reach over fraud and manipulative activities in the futures and swaps markets, as well as establish a large trader reporting system for physical commodity swaps.

The final anti-manipulation and anti-fraud rule "gives the Commission clear authority to pursue cases of intentional conduct designed to deceive or defraud market participants without the heavy burden of proving that such conduct ultimately resulted in an artificial price," said CFTC Commissioner Scott O'Malia during a public meeting in which the agency approved five final rules implementing reforms under Dodd-Frank Wall Street Reform Act.

The new rule would require the CFTC to show that a trader acted recklessly to prove fraud-based manipulation -- a much lower standard of proof than the existing one, which requires the CFTC to prove that a person intended to manipulate prices, and that it had the market power to affect the price of a commodity. Under the new rule, the agency said it would not have to prove that an accused person's actions influenced prices to make a case for manipulation.

"This is serious, significant new ammo in our enforcement arsenal," said Commissioner Bart Chilton. The existing bar for the CFTC to prove manipulation is so high that the agency has had only one successful prosecution for manipulation in 35 years. Chilton called that "nuts."

O'Malia called the final rule a "new powerful tool" that enhances the CFTC's ability to bring enforcement action for illegal conduct in both the futures and swaps markets.

"In the past the CFTC had the ability to prosecute manipulation, but to prevail, it had to prove the specific intent of the accused [was] to create an artificial price," which was next to impossible to prove, Chairman Gary Gensler said. "Under the new law...the Commission's anti-manipulation reach is extended to prohibit the reckless use of fraud-based manipulative schemes. This closes a significant gap, as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers."

This new authority expands the CFTC's ability to "effectively deal with threats to market integrity. We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants," Gensler. The final rule takes effect 30 days after publication in the Federal Register.

CFTC staff said the agency's enforcement division would need additional funding to carry out its expanded authority over manipulation and fraud in the markets.

By a 5-0 vote, the Commission approved a final rulemaking that requires clearinghouses and swap dealers to report to the CFTC about the swaps activities of large traders in the physical swaps markets.

"This is a significant rulemaking that, for the first time, enables the CFTC to receive data from large traders in the commodity swaps markets," Gensler said.

The new rule would require the filing of routine position reports on swaps that are economically equivalent to regulated futures (and options) by clearing organizations, their members and swap dealers. The reporting system would be the CFTC's source for swaps positional data until the swap data repositories are up and running, and able to provide information to the agency.

The CFTC estimates that about 100 clearing members and 100 swap dealers will be required to report. The number of clearing organizations expected to report is approximately five, the agency said.

The reporting rules would apply to 46 physical commodities, including natural gas, crude oil, coal, heating oil and gasoline. "In the energy markets, oil and natural gas and heating oil...there's been on a voluntary basis a high level of clearing of swaps" already, Gensler said. He expects that in two months "we'll be getting significant information that we don't currently have from those clearinghouses, at least in the energy swaps marketplace...I think that's good news for the Commission." Commissioner Michael Dunn expressed concern about where the agency would store the data.

The rule becomes effective for clearing members and clearing organizations 60 days after publication in the Federal Register. It would become effective for swap dealers when the CFTC's approves a rulemaking defining "swap dealers."

The Thursday meeting was the first time that the agency has approved "final" rules to implement parts of Dodd-Frank. Chilton acknowledged that the Commission is behind schedule on the final rules. "If we were in school, we'd probably get an 'incomplete,'" he said.

The CFTC was supposed to complete many of the rules implementing Dodd-Frank by July 16, the one year anniversary of the regulatory overhaul law (see Daily GPI, July 22, 2010). But with the deadline fast approaching, the CFTC last month postponed compliance with some parts of the new derivative law by at least six months to the end of the year (see Daily GPI, June 15). The Commission voted to provide "exemptive relief" to provisions of Dodd-Frank that are "self-effectuating" (do not require rulemakings to implement) on July 16.

Gensler indicated that the CFTC would hold another public meeting at the end of the month.

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